Finding common cause for offshore jurisdictions

At the end of January, Pierre Moscovici, the EU Commissioner for Economic and Financial Affairs, Taxation and Customs, penned an op-ed on “tax evasion and avoidance”, targeted at Caribbean audiences. After explaining how the EU was working towards a world of “fair” taxation and an end to tax “abuse”, he went on to stress the importance of the EU blacklist, asserting that this was beneficial for “smaller and developing countries that have more difficulties in making their voice heard on the international tax stage”.

Yes, that is right, according to Moscovici, “thanks to the EU listing process, dozens of countries have been brought into international fora such as the Global Forum and the Base Erosion and Profit Shifting (BEPS) Inclusive Framework for the first time”.

You cannot make this stuff up. But it gets better. He went on to assert: “These countries now have a place at the table when it comes also to shaping the future standards and good governance agenda – an opportunity that should be seized with both hands. This is particularly important for those jurisdictions working to build a strong, credible and resilient financial services sector.”

Moscovici then makes a very interesting observation: “Adhering to high standards of tax good governance can help entice offshore businesses onshore, thereby creating high quality jobs and boosting the local economy.” This could be read in one of at least two ways, depending on the meaning of “tax good governance”.

Corporation tax is an inefficient way to raise revenue, not least because it distorts investment away from the most economically productive assets and towards those assets that generate the highest expected after-tax income. Indeed, corporation tax almost certainly imposes a net cost on society, as Jamie Whyte notes in this issue. Thus, objectively speaking, “tax good governance” would mean, inter alia, the elimination of corporation taxes. If that were what Moscovici meant, then his observation would be correct. By eliminating corporation tax, onshore jurisdictions would indeed attract businesses that currently domicile in offshore jurisdictions. So, is Moscovici suggesting that by bringing grey- and blacklisted countries into the fold, a consensus will emerge around eliminating corporate taxation? That seems unlikely.

Far from being an opponent of corporate taxes, the EU commissioner bemoans what he sees as a conspiracy among “multinationals, wealthy individuals, consultants, [and] banks, [who] work hand in hand to subtract massive amounts of tax revenues”. He has been working hard on several fronts to make it more difficult for corporations to use legitimate means to avoid taxes. For example, he has been pushing a plan to end the unanimity rule on European Council votes relating to tax matters. This rule, which effectively establishes a veto for any EU member state, has limited the extent to which the Commission has been able to take more aggressive action against corporate tax avoidance within the EU – because some member states rightly object to such interference in their domestic fiscal affairs.

So, it seems that to Pierre Moscovici, “tax good governance” means, first and foremost, establishing powerful mechanisms to combat tax avoidance by corporations. Since corporate taxation is inherently harmful, this is rather a perverse and counterproductive interpretation of that term.

As Jamie Whyte points out, the pressure to reduce rates of corporation taxes has come largely from competition between jurisdictions, made possible by the fact that corporations could choose their domicile in part based on the likely tax burden they would face.

If the EU were to remove the veto over measures Moscovici would like to put in place to combat tax avoidance, the almost-certain effect would be a diminution in tax competition.

The same is true for his aggressive attempt to blacklist jurisdictions outside the EU. The result: corporation taxes will rise once again, to the detriment of the economy of the EU and more widely.

Going back to Moscovici’s observation concerning the effects of “adhering to high standards of tax good governance”: In response to restrictions imposed by the EU on transactions with blacklisted jurisdictions, some of the activity currently undertaken in those blacklisted offshore jurisdictions will move to other jurisdictions. Initially perhaps it will move to other offshore jurisdictions. But it seems more than likely that Moscovici and others like him will continue to expand the blacklist until it encompasses any jurisdiction that enables corporations to avoid taxes that might otherwise be extracted by EU member states.

Indeed, Moscovici makes this clear at the end of his op ed, while also proffering a patronising offer: “The EU fully understands the specific vulnerabilities of the small island developing states and coastal states of the Caribbean. We understand their need to find new sources of growth. … “… In recognition of the administrative capacity constraints that many Caribbean countries face, the EU has put in place a technical support programme through the Caribbean Regional Technical Assistance Centre (CARTAC), to assist these administrations to make the necessary legal and technical adjustments to their financial regimes in order to be compliant with international standards. “The EU list of non-cooperative tax jurisdictions is not the end goal. Rather, the goal is to promote the highest level of tax good governance globally, so that all taxpayers and countries can enjoy the benefits of fair taxation. I believe that the EU and Caribbean partnership can benefit immensely from joining forces in this quest.”

In other words: we know we are going to harm your economy by preventing companies from domiciling there, but do not worry, we will send you some lawyers and accountants so you can implement the self-harming changes to your tax regimes.

Eventually, this “tax good governance” would end tax competition altogether. That is good news for politicians, who like nothing better than imposing taxes that are not directly felt by the majority of voters. But it is bad news for the global economy – and especially for offshore jurisdictions.

For all his dissembling bluster, perhaps there is something in Moscovici’s suggestion that offshore jurisdictions should work together with one another (but perhaps not together with the EU). They might even find common cause around “tax good governance” if that term were appropriately defined – i.e. including a strict prohibition on corporate taxes.

Oliver Treidler identifies another area of “tax good governance” in which offshore jurisdictions should be working together: the digital tax. This idea was championed by Moscovici in the EU but faced opposition from Ireland and is thus another reason he wants the EU to switch to majority voting on tax issues. Now, the OECD, presumably acting at the behest of the EU, has taken up the mantle. Here, offshore jurisdictions can find common cause with many jurisdictions that would be harmed by the hegemonistic imposition of an arbitrary tax on online platforms.

Offshore and other low tax jurisdictions might also work together to combat other neo-colonial threats, such as the push for public registers of beneficial ownership. As Diego Zuluaga notes, such registers are unnecessary, risk exposing wealthy individuals who have done no wrong, while doing little to expose criminals, and are likely counterproductive.

Make no mistake, low-tax jurisdictions face unprecedented threats from foreign governments who fear a loss of corporate tax revenue. Yet, as we have written before, these jurisdictions contribute to economic growth onshore and, through that growth, to rising government revenue. In their attempt to quash tax competition and increase tax revenue from corporations, these foreign governments will harm their own economies, as well as those of the offshore jurisdictions.

It is time for well governed low-tax jurisdictions to put aside their differences, identify areas in which they have common cause to take action, and make the case for true good governance and against the neo-colonial tax hegemons.

Julian
graduated from the University of Edinburgh with a Masters in economics.
Graduate studies at University College London, Cambridge University and
the University of Westminster resulted
in two further masters’ degrees and a Graduate Diploma in Law
(equivalent to the academic component of a JD).

Julian
is the author of dozens of scholarly articles on issues ranging from
the morality of free trade to the regulation of the Internet, although
his academic research has focused primarily
on the relationship between institutions, economic development and
environmental protection. He has also edited several books and co-edits,
with Indur Goklany, the Electronic Journal of Sustainable Development (www.ejsd.org).

Julian
is also a visiting professor in the Department of International Studies
at the University of Buckingham (UK). Before joining Reason, he was
executive director of International
Policy Network (www.policynetwork.net),
a London-based think tank which he co-founded. Before that, he ran the
environment and technology programme at the Institute of Economic
Affairs, also in London.

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